AUSTIN, Texas January 05, 2005,
By R.J. Lehmann, associate editor (BestWire) - Emboldening partisans
on both sides of the credit-based insurance-scoring debate, a new study
from the Texas Department of Insurance suggests consumer credit
information may accurately predict the likelihood of homeowners and auto
claims, while also finding that use of such information in underwriting
disproportionately impacts black and Hispanic policyholders.
Using data culled from the credit-scoring models of six personal-lines
insurer groups operating in Texas — representing roughly 1.2 million
personal auto policies and 800,000 homeowners policies — the department
presented the study, which was commissioned by a 2003 state law, to
Texas Gov. Rick Perry and members of the state Legislature, whose 79th
session begins later this month.
"We were charged with looking at the issue from a data perspective, and
we took the time and effort to craft the best study we could come up
with in the time frame," department spokesman Jerry Hagins said. "We're
very pleased with the thoroughness of it. We think it will be really
helpful in guiding the policy deliberations during our upcoming
The initial study — which uses a "univariate" analysis that compares
credit score to pure premium, in the case of auto, and loss ratio, in
the case of homeowners — finds that "there appears to be a strong
relationship between credit score and insurance risk." In the case of
the personal auto policies, as credit scores worsened, the researchers
found that the average loss per vehicle increased, while a similar,
though less definitive, trend also was found in declining loss ratios
for better credit risks, the department reported.
Nonetheless, the department cautioned that credit-based scoring simply
may reflect other characteristics, such as income, and it was less clear
to what extent such other factors may or may not be even more predictive
of loss experience. Toward that end, the department expects to complete
its more comprehensive "multivariate" study by Jan. 31.
"It is necessary to evaluate if, and to what extent, credit scoring
enables an insurer to more accurately predict losses," the researchers
wrote. "Thoroughly analyzing this issue requires simultaneous analysis
of the variables affecting likely claims experience."
Underscoring the need for a more extensive study was the department's
finding that the state's blacks and Hispanics tend to be
over-represented in the worst credit score categories and
under-represented in the better credit score categories, the researchers
noted. Using supplemental demographic data from the Texas Department of
Public Safety, the researchers found that, as a whole, blacks had
average credit scores that were 10% to 35% worse than the average scores
for whites, while Hispanics had average scores that were 5% to 25% worse
than those for whites. The average credit scores for Asian-Americans
were about the same or slightly worse than those for whites, the
To identify Hispanics, who are categorized as a separate race by DPS
statistics, the department sorted policyholders according to a list of
Hispanic surnames provided by the Texas Office of the Secretary of
State, acknowledging that, in doing so, "some Hispanics were likely
miscoded as white, while some whites were likely miscoded as Hispanic."
Credit scores are used to determine rates or rating tiers by roughly 42%
of insurers writing homeowners in the state, and about 55% of those
writing personal auto, the study found. In the personal auto market, 90%
of policyholders experienced a rate swing as a result of an insurer's
use of credit information, with 10% experiencing increases or decreases
of 40% or more. In the homeowners market, 90% of policyholders
experienced either no rate swing or one of less than 30%.
Immediate reaction to the study was mixed, as both supporters and
opponents of credit-based scoring were quick to point to the
department's findings as supporting their position.
"The Legislature was concerned about credit-scoring discriminating on
the basis of race, which is why they asked the department to do the
study," said Birny Birnbaum, executive director of the Austin-based
Center for Economic Justice. "They now have the results of the study. It
does discriminate on the basis of race. So now that they've found the
answer, it seems pretty obvious what they need to do — ban
credit-scoring. If you're not going to allow somebody to discriminate on
the basis of race directly, then why would you allow them to use a proxy
to discriminate on the basis of race indirectly?"
In contrast, the Insurance Council of Texas pointed to the study as
vindication of the industry's oft-stated position that insurance scoring
is an objective and "colorblind" process that has proven itself an
accurate predictor of insurance losses.
"The use of credit scores is an everyday fact of life," council
spokesman Mark Hanna said. "They are used in obtaining jobs, finding an
apartment, purchasing a home and buying nearly every type of major
appliance. Credit scores are an underwriting factor that an individual
can control and improve. By paying bills on time and managing their
finances, policyholders can see a marked improvement in their credit
score, which can lead to better insurance rates."
Striking a somewhat more cautious tone, the Property Casualty Insurers
Association of America characterized the study as a "preliminary review"
and urged lawmakers to reserve judgment until a more detailed analysis
"Studies that attempt to link credit information with race or income are
extremely complex," PCI said in a statement. "While several states such
as Alaska, Missouri and Washington have attempted to conduct this type
of study, each one has suffered from critical flaws in the methodology
and failed to adequately consider loss histories, which rendered the
But pointing to the findings of previous studies that were similar to
those of the Texas study, Birnbaum said the links between credit scores
and race now are so well-established as to make debating the point
"Even if you control for income, you will find that credit-scoring
discriminates on the basis of race," Birnbaum said. "That's consistent
with research that I've done in the past on insurance availability.
We've done analyses showing that your likelihood of being rejected by
the standard and preferred auto market is four times as great if you
come from a poor, minority neighborhood as if you come from an affluent,